Computech Corporation is expanding rapidly and currently needs to retain all of

Question

Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $1.00 coming 3 years from today. The dividend should grow rapidly - at a rate of 32% per year - during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 17%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Explanation / Answer

D4=(1*1.32)=$1.32

D5=(1.32*1.32)=$1.7424

Value after year 5=(D5*Growth rate)/(Required return-Growth rate)

=(1.7424*1.09)/(0.17-0.09)=$23.7402

Hence value of stock today=Future dividends*Present value of discounting factor(17%,time period)
=1/1.17^3+1.32/1.17^4+1.7424/1.17^5+23.7402/1.17^5

which is equal to

=$12.95(Approx).

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